NewEconomy
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NewEconomy

The Bank of Japan releases the report titled “Technical Challenges for Central Bank Digital Currency to Function as Cash Equivalents”

The Bank of Japan released a report titled “Technical Challenges for a Central Bank Digital Currency to Function as a Cash Equivalent”.

In order for central bank digital currency (CBDC) to have functions similar to those of cash, it is extremely important to discuss and demonstrate how to provide “universal access” and “resilience,” which are the two characteristics of central bank digital currency.

The report states that universal access is a payment method that anyone can use safely and reliably anytime and anywhere, and resilience is the ability to withstand communication and power interruptions.

And the central bank digital currency (CBDC) has three key features: the entity that manages it, the method of recording information, and the place where information is managed.

Each of the three items has its own characteristics, according to the company. There are two types of management entities: centralized and decentralized. There are two types of information recording methods: account type and token type. There are two types of information recording methods: account and token, and the location of information can be categorized as either remote or local.

The report discusses and describes offline payment in detail. An example of offline-payment is the Kenyan pilot program “DigiTally”. Consideration has also been given.

The reason for the discussion on offline-payment was that the existing private-sector payment system is this is because in many cases, only online payments are supported. In an offline environment, ledger managers cannot confirm transactions, so it will be important to have a mechanism to ensure that payment finality is safe, secure, and fast using the user’s terminal.

And as a function required for offline payment, it is described in five reports. These are (1) safe storage of monetary value, (2) communication of information between users, (3) authentication of holders and terminals, (4) payment instructions, and (5) securing power.

However, in order to implement offline payment systems, there are not only technical issues to be solved at the implementation stage, but also design and operation of CBDC, such as safeguards for the security, and compliance issues such as ensuring privacy and dealing with AML/CFT (Anti-Money Laundering and Anti-Terrorism).

Japanese banks will continue to conduct feasibility tests to confirm the feasibility of CBDC from a technical point of view, and will also consider CBDC in cooperation with foreign central banks and other related institutions in Japan and abroad.

(images:iStock/stockdevil・antoniokhr・PrettyVectors)

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